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Wednesday A.M. - GBP Eyes Services PMI, Parliament | AUD: GDP Underperforms | CAD: BoC Decision

Exchange rate markets

Image © Daniel Sky Photo, Adobe Stock

The sudden risk-off swing in market sentiment provides the backdrop to midweek trade.

The U.S. Dollar rallied as investors liquidated exposure to stocks, and the currency has strengthened further in the Asia session.

President Trump indicated he would negotiate a “real deal” with the Chinese government or have no deal at all.

However, reports also suggest that Chinese officials have been told to prepare resuming soy and LNG imports suggesting they intend to stand true to their word.

This particular piece of news has ensured the selloff in the Asian session is less severe than that seen in the U.S. session. The S&P 500 slumped by more than 3%, Asian equity markets also fell but by only 0.4‑1.7%.

"If the story is true, it sounds like the Chinese government is backing down in its trade frictions with the U.S.  But there was no repeat support for the commodity currencies like that which occurred on Monday," says Joseph Capurso, a strategist with Commonwealth Bank of Australia.

As would typically be expected under such scenarios, the Australian Dollar is an under-performer and the U.S. Dollar has outperformed. However, the Aussie was subject to some poor domestic data overnight (see below) which will help explain the currency's poor showing.


GBP

GBP

Service PMI data are due out today and markets will be wanting to see whether  the it will seal a hat trick of better-than-forecast data at the start of December.

Markets are forecasting a reading of 52.5 for November, up on the previous month's 52.5.

Both Manufacturing and Construction PMI data came in ahead of expectations this week with the former suggesting UK firms are sourcing from domestic suppliers to safeguard against a disruptive Brexit.

This creates a domestic-lead boost to growth and mitigates against the worst of any Brexit-induced damage.

A beat on expectations could help the under-pressure Pound, but we believe any moves following the release will soon be faded as market attention ultimately remains fixated on Brexit developments.

Brexit will of course be the key driver of Sterling over coming days with the December 11 vote on the government's Brexit deal being a potential catalyst to a more sizeable move.

The House of Commons enters day two of their five day debate on the Brexit deal and while there are a great deal of developments to note the main takeaway from a currency perspective is that the many Brexit scenarios that can now play out creates an air of uncertainty for Sterling.

We don't see the currency staging any significant move in this environment.

 

EUR

EUR

We have a host of PMI data out this morning which is likely to give a steer on the direction of Eurozone economic growth.

Recall, one of the themes in the FX market at present concerns that of the slowing of the Eurozone economy witnessed since mid-year.

Today's numbers should give an indication of how the Eurozone economy intends to close out the year. A poor set of numbers should confirm to markets that the European Central Bank's expectation to start raising interest rates in Autumn 2019 might be a little too optimistic. The Euro has underperformed on this assumption.

Therefore, a pickup in the data would present the kind of positive surprise that could give the single-currency a helping hand.

The Eurozone composite PMI (all PMIs rolled into one) is due out at 09:00 GMT and a reading of 52.4 is expected, the Services PMI out at the same time is expected to deliver a reading of 53.1.

The French Composite PMI is forecast to read at 54.0 while the Services component is forecast to read at 55.0.

The German Composite PMI is forecast to read at 52.2, the Services PMI at 53.3.

"EUR/USD currently seems reluctant to break down presently. However any attempt to make gains are quickly defeated and currently the market is relatively neutral," says Karen Jones, a technical analyst with Commerzbank in London.


USD

USD

Broader dynamics are expected to move the Dollar.

Jerome Powell’s testimony to the Joint Economic Committee has been cancelled owing to the closing of U.S. markets in order to observe President Bush's funeral.

Expect illiquid market conditions today which could prompt outsized moves in the markets as a result.
 

AUD

AUD

Data overnight disappointed with GDP for the third quarter showing 0.3% growth in the Australian economy. Markets had been expecting a more bullish 0.6%.

Annualised GDP read at 2.8%, whereas 3.3% had been expected.

More data is due tonight at 00:30 GMT with the release of Australian retail sales and trade balance for October.

Retail sales are expected to have grown 0.2% while the trade balance is expected to read at A$3.2BN.


CAD

CAD

The Bank of Canada deliver their latest policy decision and release their interest rate statement for December.

Interest rates are expected to be maintained at 1.75%, therefore it is what is said in the accompanying statement that will matter for the Canadian Dollar.

"The communique should be fairly short, and while the Bank will note that weaker commodity prices present a headwind to the outlook, we expect that they will again warn that higher interest rates will be needed," says Andrew Kelvin at TD Securities.

TD Securities say there is a 60% chance the BoC will reflect on lower oil prices since October pointing to softer growth, while temporary production cuts will weigh on near-term outlook.

CPI tracking below previous estimates due to energy and wider output gap.

The BoC is expected to say they are committed to taking interest rates to neutral, but the pace will be data dependent. TD Securities forecast USD/CAD to trade around 1.3250 as a result.


NZD

NZD

The release of the results of the latest dairy auction show an increase of 2.2% in the GDP Price Index from the previous event, the first increase since  May.

Could this represent a turn in fortunes for New Zealand's largest export? If the answer is yes, then we could expect the New Zealand Dollar to receive some homegrown support going forward. Interestingly, analysts were expecting prices to fall amidst the strong expansion in New Zealand dairy production this year, which has put a lid on dairy prices.

Therefore, rising prices and rising rising output represent something of a sweet spot for the sector and New Zealand exports as a whole.

A total of 36,450MT of product was sold at the Tuesday auction, with whole milk powder prices increasing by 2.5% to US$ 2,667 MT. Butter milk powder was the standout performer with prices rising 16.9%, while skimmed milk powder prices inched up 0.3%.

Third quarter construction work came in at +0.7% quarter-on-quarter, below consensus expectations for a reading of 2.3%.

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